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Hi,
In Q3a. Amberle (Dec 2108), for the calculation of tax shield of subsidized loan (W4); Why isn’t the issue cost for subsidized loan= 2.4m (from W3) not added in the value of the subs loan (so 80m+2.4m instead of just 80).
Also can I use the risk free rate of 4% for discounting tax shield? Not 8 or 3.1.
The examiner has got it wrong here. Because he said that the issue costs are 3% of the gross proceeds, the issue costs are 2.4m and so the borrowing is 82.4m and the tax shield should have been calculated using this amount.
As far as the risk free rate is concerned, yes – you could have used 4% for the discounting 🙂
Alright got it. Thank you!
Similarly, when calculating the subsidized benefit we’d use 82.4 not 80 right?
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Aren’t the issue costs supposed to be paid upfront instead of included in the loan itself? So that means there should not be any tax shield from the issue cost itself. I am thinking real life now.
There is no tax shield on the issue cost itself. The tax shield is on the loan interest and it is a question as to whether or not the amount borrowed cover the issue costs or whether they are paid out of existing funds. Either may be the case in real life.
Hi,
Continued from my original question:
Similarly, when calculating the subsidized benefit we’d use 82.4 not 80 right? For the subsidized loan value again.
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